When not gushing about their unending love for "Options Action," a frequent question we get from viewers is how we derive our "In The Zone Probabilities."
Case in point: John from Massachusetts, who writes the following:
Good show. Keep it going. I'd like to know where the "probable stock range on earnings" information comes from for the In the Zone segment of the show.
Very good question John.
In The Zone is derived from a unique function on the thinkorswim trading platform.
The probability that we assign to stock prices is calculated by looking at the implied volatility of a company's options, demand for puts and calls on that company's stock - known as skew in option parlance - and the probability that the individual option contract will expire in-the-money.
As with anything, In The Zone is merely a snapshot of where option prices imply a stock will go, and obviously could change, but it does offer a quick glimpse into how the options market is anticipating an event. And the graphic is pretty cool too.
Thanks for your continued interest in the show John.